Usury (Ribaa)

Usury (ribaa): is the practice of assigning a fee on credit and other borrowed assets on top of the principal borrowed amount, thus making a profit on the loan, which is strictly prohibited in Islam due to the harm and injustice involved in it.

Ribaa is of different types, but the most serious type of ribaa, and thus the one that is all the more unlawful, is one relating to loans and debts. It covers any stipulated additional amount over the principal in a transaction of loan or debt and is of two types.

Every loan or debt from which the lender makes a profit is a form of ribaa.

Ribaa on Debts

This type of ribaa exists in every debt, which carries a stipulation binding the debtor to pay to the creditor any sum of money in excess of the principal sum of the debt.

Example: John borrows £1000 from Martin and promises to pay it back after a month. However, John finds himself unable to pay the debt off after a month and so Martin, the creditor, stipulates that John either pays the debt off without any excess of the principal sum of the debt or pay £1100 after another month. If, however, he still cannot possibly pay that sum off either after a month, Martin will defer payment another month on condition that John pays £1200.

Ribaa on Loans

In this type of ribaa, a person takes out a loan from another person or from a bank with the stipulation at the time of the contract that the borrower must pay an annual interest both parties agree upon of, say 5%, on the borrowed amount to the lender.

Example: John is interested in a house which is worth £100,000 but does not have enough money to purchase it, so he takes out a loan from the bank on condition that he must pay the bank £150,000 in monthly instalments over a period of five years. Ribaa is strictly forbidden in Islam and is one of the major sins as long as the loan is taken out with interest, whether it is an investment loan for financing a business or industry or purchasing a vital asset such as a house or property, or a consumer loan for personal, family or household purposes. However, purchasing goods in instalments at a price higher than the actual price paid in cash is not considered a form of ribaa. Example: A person has the choice to purchase a kitchen appliance for £1000 and pay for it in cash or for £1200 in monthly instalments, paying a monthly amount of £100 to the owner of the store from which he purchased the appliance.

The Islamic Ruling on Ribaa

Textual evidence from the Qur’an and the Prophet’s traditions, points out that ribaa is strictly forbidden in Islam, that it is one of the major sins and that Allah has not declared war on any one of the sinners except those who deal with ribaa. In fact, ribaa is forbidden, not only in Islam but also in all previous divine religions. Such a ruling, however, was changed after numerous distortions crept into the religious texts of such religions, and altered many other rulings. Allah ﷻ mentions that he inflicted punishment on a group of the People of the Book “for their taking usury although it had been forbidden to them.” (Soorat An-Nisaa’, 4:161)

Punishment for Ribaa

Those who engage in usurious transactions expose themselves to a war which Allah ﷻ and His Messenger ﷺ have declared on those who deal with ribaa, thereby becoming their enemies. As the Qur’an states, “If you do not do so, be warned of war from Allah and His Messenger. But if you repent, you may have your capital, without wronging and without being wronged.” (Soorat Al-Baqarah, 2: 279) Indeed, such a war leaves devastating physical and psychological effects, and the numerous forms of deep anxiety and depression that have afflicted people these days are some signs of such a war which Allah has declared on those who disobey His commands by engaging in usurious transactions. The effects of such war in the hereafter will be far worse than one can possibly imagine.

Those who engage in usurious transactions in any way are deprived of Allah’s mercy. Jaabir ibn‛Abdullaah  narrated: “Allah’s Messenger cursed the person who accepts usury (interest), the one who gives it, the one who records it and the two witnesses to it.” He said, “They are all sinners.” (Saheeh Muslim: 1598)

They will be resurrected on the Day of Judgement in such an unsightly manner that they will be staggering, jerking and shaking like someone suffering from madness or experiencing epileptic seizures, as the Qur’an states, “Those who take unlawful interest will stand before Allah [on the Day of Judgement] as those who suffer from a mental imbalance because of Satan’s touch.” (Soorat Al-Baqarah, 2: 275)

Profits made from usurious transactions, no matter how massive they may look, will be deprived of all blessing, and those who make use of such profits will find neither happiness, nor peace of mind, as the Qur’an states, “Allah deprives usurious gains of all blessing, whereas He blesses charitable deeds with manifold increase.” (Soorat Al-Baqarah, 2: 276)

Detrimental Effects of Ribaaon the Individual and Society

Islam has strictly forbidden ribaa due to the great deal of harm it is bound to inflict on both the individual and society. Such detrimental effects include the following:

It causes a severe disorder in the distribution of wealth and widens the gulf between the rich and the poor

Because ribaa tends to concentrate wealth in the hands of a few individuals and prevents it from being used for the general good of the community, it causes an inequitable distribution of wealth and resources and divides society into a tiny super-rich minority and a large poor or deprived large majority, a state of affairs which normally gives rise to hatred and crimes in society.

It encourages wasteful extravagance

The fact that taking out loans from financial institutions that charge interest on such loans has become more readily available than ever before has encouraged many people to become big wasters. Finding a financial institution from which to borrow money to meet all kinds of needs, they tend to spend lavishly on luxury items, only to find themselves burdened by debts which cause them depression, anxiety and stress and which they cannot possibly pay off.

It dissuades investors from investing in domestic beneficial projects

Lured by the interest gains the usurious system allows investors to derive from their capital, they desist from investing their capital in domestic industrial, agricultural and commercial projects, no matter how beneficial such projects may be to society, as they believe these projects involve some risk and require a great deal of effort.

It deprives wealth of all blessing and leads to economic crises

All economic crises undergone by financial institutions and individuals alike are, in the main, caused by persistence in engaging in usurious transactions and are some of the reasons why such transactions are deprived of all blessing, as opposed to charitable deeds which are bound to bless wealth and increase it. As the Qur’an states, “Allah deprives usurious gains of all blessing, whereas He blesses charitable deeds with manifold increase.” (Soorat Al-Baqarah, 2: 276)

Ribaa deprives wealth of all blessing and is bound to lead to economic crises.

What is the ruling regarding a person who embraces Islam while he is a party to an usurious contract?

This involves two cases:

1. If he is the party that takes interest, he is only entitled to his capital and must desist, as soon as he embraces Islam, from taking any interest whatsoever, as the Qur’an states, “But if you repent, you may have your capital, without wronging and without being wronged.” (Soorat Al-Baqarah, 2: 279) If he receives any further interest after embracing Islam, he can get rid of it by donating it to charity to support charitable causes.

If he is the party that pays interest, two cases are involved here:

If he can cancel the contract without incurring huge losses, then he must do so.

If, however, he cannot cancel the contract except by incurring huge losses, he may fulfil the terms of the contract but must show strong determination not to enter into such contracts ever again in the future, as the Qur’an states, “Whoever is given a warning by his Lord and then desists, may keep what he received in the past and his affair is Allah’s concern. As for those who return to it, they will be the Companions of the Fire, remaining in it timelessly, for ever.” (Soorat Al-Baqarah, 2: 275)

Are you the creditor and the party that takes interest?

Yes

You are only entitled to your capital without taking any interest whatsoever.

No

If you are the party that pays interest, can you cancel the usurious contract without incurring huge losses?

Yes

You must cancel the contract if you can without incurring any losses

No

You may fulfil the terms of the contract but must show strong determination not to enter into such contracts ever again in the future.